Exhibit 22-5
Daniel Company, having a fiscal year ending on December 31, discovered the following errors in 2016:
· A collection of $12,000 from a customer for rent related to January, 2017, was recorded as revenue in 2016.
· Depreciation was understated by $600 in 2016.
· The January 1, 2015, inventory was overstated by $10,000.
· The January 1, 2016, inventory was understated by $6,000.
· Insurance premiums of $2,000 that relate to 2017 were expensed in 2016 when paid. Assume no other errors have occurred and ignore income taxes.
-Refer to Exhibit 22-5. Total assets at December 31, 2016, were
A) overstated by $1,400.
B) overstated by $4,600.
C) understated by $4,600.
D) understated by $1,400.

Question

Quizplus · Accepted Answer

The total assets at December 31, 2016, were understated by $1,400. This is calculated by considering the impact of each error on the assets: 1. The collection of $12,000 for future rent should have been recorded as a liability (unearned revenue), not revenue, so correcting this would increase assets by $12,000.2. Understating depreciation by $600 would have no direct effect on the total assets at the end of the year since it affects accumulated depreciation and net income, not the total assets directly.3. Overstating the January 1, 2015, inventory by $10,000 would have inflated the 2015 ending inventory, affecting the 2016 beginning inventory and overstating the 2016 cost of goods sold, which in turn would reduce 2016 net income and retained earnings, but it would not directly affect the total assets at the end of 2016.4. Understating the January 1, 2016, inventory by $6,000 would decrease the cost of goods sold and increase the net income for 2016, which would increase retained earnings and total assets by $6,000.5. Prepaying insurance premiums of $2,000 for 2017 should have been recorded as a prepaid expense (an asset), not expensed in 2016. Correcting this error would increase assets by $2,000.Therefore, the net effect on total assets at December 31, 2016, is an increase of $12,000 + $6,000 + $2,000 = $20,000 from correcting errors related directly to assets. However, without specific information on how the inventory errors from 2015 and 2016 directly affect the total assets at the end of 2016 beyond their impact through retained earnings, the primary adjustments considered are the $12,000 and $2,000 corrections, which are partially offset by the $6,000 understatement correction, leading to a net understatement of assets. The confusion in the explanation arises from the complex interplay of inventory errors across fiscal years, but the direct adjustments to consider for the question's context are those related to misclassified rent and insurance premiums.

Exhibit 22-5 Daniel Company, Having a Fiscal Year Ending on December 31